Japan abruptly acts to stimulate economy

New York Times

Updated
5:49 pm PST, Sunday, November 2, 2014

A man walks past a security firm’s electronic stock board in Tokyo. Japan's Nikkei 225 stock average surged 5 percent, and the yen slid against the dollar after the Bank of Japan unexpect edly an nounced new stimulus to boost a flagging economic recovery. less

A man walks past a security firm’s electronic stock board in Tokyo. Japan's Nikkei 225 stock average surged 5 percent, and the yen slid against the dollar after the Bank of Japan unexpect edly an nounced new ... more

Photo: Eugene Hoshiko / Associated Press

Photo: Eugene Hoshiko / Associated Press

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A man walks past a security firm’s electronic stock board in Tokyo. Japan's Nikkei 225 stock average surged 5 percent, and the yen slid against the dollar after the Bank of Japan unexpect edly an nounced new stimulus to boost a flagging economic recovery. less

A man walks past a security firm’s electronic stock board in Tokyo. Japan's Nikkei 225 stock average surged 5 percent, and the yen slid against the dollar after the Bank of Japan unexpect edly an nounced new ... more

Photo: Eugene Hoshiko / Associated Press

Japan abruptly acts to stimulate economy

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TOKYO — Japan is opting for another round of shock treatment, in a stark admission that the country’s economic revival plan is faltering.

After insisting for more than a year that its aggressive monetary action was sufficient, the Bank of Japan on Friday unexpectedly announced that it would buy larger quantities of government debt. By injecting more money into the economy, the central bank is trying to keep borrowing costs low, encourage spending and, ultimately, stoke inflation and growth.

The bold move helped push stocks higher around the world.

In Japan, the Nikkei 225-stock index average hit fresh highs, jumping almost 5 percent for the day. The yen fell to its weakest level against the dollar in a month.

The central bank’s stimulus has been the cornerstone of a nearly two-year effort by Shinzo Abe, Japan’s prime minister, to reinvigorate the economy and end the persistent consumer price declines that have weighed on growth since the 1990s. But that plan, collectively known as Abenomics, has shown signs of strain lately, as economic output contracted sharply in the second quarter.

With pressure mounting, the central bank said it wanted to act preemptively, rather than risk eroding the progress the country has made in changing the public’s deflationary mind-set. The Bank of Japan said it would make asset purchases of $734 billion.

The decision underscores Japan’s divergent path with the United States. Citing the strength in the U.S. economy, the Federal Reserve ended its six-year bond-buying campaign last week, an important milestone in the country’s recovery.

The Bank of Japan is hardly alone in struggling to keep consumer prices rising at a rate considered desirable by central bankers — typically about 2 percent, a level where increases are mild but still comfortably above deflation.

Prices have been falling in parts of crisis-stricken Europe. Even in the United States, where the economy is stronger and the Fed’s bond-buying program had been criticized by some inflation hawks, the rate remains below the official 2 percent objective. Sweden’s central bank, considered one of the most inflation-phobic, cut its benchmark short-term interest rate to zero last week in an effort to ward off falling prices.

Moves to lift inflation

Japan’s rate has been at zero for years, prompting it to explore such experimental measures as quantitative easing, in which the central bank buys huge quantities of government debt and other assets in an effort to hold down longer-term rates, lowering borrowing costs for businesses and consumers.

Abe’s handpicked central bank governor, Haruhiko Kuroda, greatly expanded a bond-buying program at the central bank in April 2013. Kuroda has maintained that the new monetary settings would be enough to lift inflation to 2 percent by about mid-2015.

The strategy has provided a much-needed jolt to the economy, albeit one whose effects have been unevenly distributed. Cheap money and the depreciating effect it has had on the yen have encouraged investors to pile into shares of big manufacturing companies like Toyota and Hitachi. Those companies’ profits have risen with the currency’s fall because they do much of their business outside Japan in currencies like the dollar and the euro.

The markets are likely to get another lift next year, as the government’s giant pension fund moves more aggressively into stocks. The Government Pension Investment Fund said Friday that it would aim to hold 50 percent of its assets in stocks, up from 24 percent now.

The announcement by the central bank amounted to an acknowledgment that the economy needed even more help.

Consumer spending has slipped since the sales tax increase of three percentage points in April. Falling oil prices, too, have had an inflation-dampening effect. While prices have been rising, the Bank of Japan’s favored measure of consumer inflation, which excludes the price of fresh food, has been stuck at just over 1 percent for months. The bank also said that its stimulus measures had had a smaller-than-expected effect on growth, cutting in half its estimate for expansion in gross domestic product in the fiscal year ending in April to 0.5 percent.

Average income falls

Uncomfortably for policymakers, the recent bout of mild inflation has also been uneven. Exacerbated by the sales tax increase, prices have been going up faster than incomes, in effect making many people poorer. Adjusted for inflation, average incomes for working households were down 6 percent in September, according to government data released last week.

“If you’re a small business, or if you’re working a part-time job, you feel that nothing has come your way,” said Kathy Matsui, an analyst at Goldman Sachs. She added that she supports Abe’s fight against deflation, as well as other goals like deregulation and corporate governance reform.

Beating deflation has long been a goal in Japan, one that has eluded successive prime ministers and central bank chiefs. Kuroda’s efforts have been the most successful so far, yet not everyone is comfortable with his headlong approach to creating money.

As in the United States and elsewhere, critics in Japan have warned that quantitative easing encourages the government to pile up debt and could one day lead to runaway inflation. And in a country that still feels the effects of a disastrous land and stock bubble that burst more than 20 years ago, fears of undue asset-price surges remain.

Contentious decision

The central bank’s decision to increase its bond purchases was contentious. Four out of nine of the policy board members voted against it — a far closer margin than for any other decision by the central bank since Kuroda took over.

But Kuroda, at a news conference, said the central bank had an “unwavering commitment to escaping deflation.” In addition to increasing the scale of its bond market intervention, the central bank backed away from its previously specific timetable. It said simply that it would keep its easing measures in place “as long as it is necessary to maintain that target” of 2 percent inflation “in a stable manner.”

“We will do whatever it takes to achieve our price target,” Kuroda said.